Tag Archive | "pensions"

Are pension rules set to change in the March Budget?

Contractor accountants may be concerned to learn that George Osborne is considering changing tax relief on pension contributions when he delivers the March Budget.

He has various options available to him. If he cut the relief on all contributions to 20%, taxpayers who pay the higher 40% rate would lose £20 for each £100 they invested and those paying the 50% top rate would lose £30 per £100 invested. On top of that, pensions are subject to tax so a taxpayer might have to pay tax at 40% or even 50% on their pension when they retire.

If this happened, a lot of people in defined benefit schemes might have to file a tax return because the pension benefits could not be determined as easily as they can with a defined contribution scheme.

PwC’s head of pensions, Raj Mody, explained that if tax relief on pensions was reduced, those people who pay a higher rate of tax could be better off if they received cash and paid income tax on it at the time.

The Chancellor is also considering reducing the annual allowance of £50,000. PwC says this would be easier to implement and people would still have an incentive to invest money in a pension fund.

Another option would be to reduce the tax-free lump sum people are entitled to on retirement. Those approaching retirement would then pay more tax than they expected on their pension pot.

Mody did warn that there have already been various changes to pensions in recent years and the public may lose trust completely if the Government implements further amendments.

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IR35 – and still it rumbles on…

Since outing Mr Lester as a tax avoiding monster intent on destroying the UK economy single-handed, the press and the BBC have continued to turn up cases where people are working for the Civil Service in a range of senior roles but who aren’t actually Civil Servants. Gosh, who’d a thought it…

The reason for all this angst is, of course, that these people are not paying the same taxes as they would as employees. OK. And your point is, exactly? That is wrong on so many levels you wonder just how much research these journalists have done.

Firstly the workers are almost certainly paying all the taxes they are due to pay. Contractors – for that is what they are, even those labelling themselves as interims – don’t use limited companies as a tax avoidance device. As I explained last week most of the time if they haven’t got a company or work through an umbrella, they won’t get the work at all.

Secondly, of course, they tend to charge rather more than the equivalent Civil Servant while they are working. So although they may pay a lower percentage than an employee, they will quite probably be putting more back in the revenue’s coffers that the said employee. Plus, of course, when their time is done, they leave with none of the costs that a redundant permie will incur.

So a contractor doing basically a time-bound role is not costing anybody anything; in fact, they may well prove to be more economic. Perhaps that’s why Cameron values the freelance contractor workforce as adding £20bn to the UK economy every year.
But, all that aside, there are still a couple of issues that do need to be cleared up.

The first is that a major benefit of using a contractor to fill a permanent post is that the employer – in this case the Civil Service and related public bodies – is stepping away from quite a lot of costs. They avoid having to pay employer’s NICs for one thing. They also avoid the costs of training, sick pay provision, pensions and a whole heap of incidentals. And that applies whether you’re talking about hotel chambermaids or Programme Directors. Get them off your headcount and you’re saving serious money.

So, question one: how many of these roles are filled by contractors only to benefit the employers?

The second is that the row is basically about people in senior Civil Service roles. Which rather begs the question, why are there not suitable candidates coming up through the ranks to take over these roles as the incumbent moves on? Where is the succession planning that any executive ought to be applying to their own role?

For example, our dear friends at HMRC saw fit to retain their Head if IT (at, it has to be said, a ludicrously inflated rate) when he stood down until a replacement could be found. Secondly the even more esteemed Mr Hartnett is leaving HMRC and being replaced by someone moving sideways from another Department entirely because, according to Hartnett, there are no suitably qualified replacements available.

So, question two: why the hell not?

There are lots of things wrong that have led to this whole bun fight. However, using contractors as a key resource and then bitching about their tax arrangements is not one of them.

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

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Good contractors are worth every bit of their day rate!

Regular readers will know I have never had a lot of respect for the average agency, thinking that most of them exhibit a degree of professional casualness totally at odds with their advertising. Today, for example, I got another email offering me work as a support technician in the Midlands at a whole £20k a year. Be still my beating heart.

But this week, one of them has managed to surpass even that fairly mediocre level of success.

Someone in Hays thought it a good idea to remind the people contracting through them to RBS to complete their timesheets prior to the bank holiday weekend. So they sent out an email, with, for some reason, an attachment. Followed very quickly – but not quickly enough, needless to say – by a recall of the email.

Why? Because the attachment contained a list of 3000 contractors, their day rate, the day rate to Hays and a few other interesting details. It seems that some of these contractors are on really quite juicy rates. Oops…

OK, so perhaps that’s the rate for a senior HR manager in charge of a multi-million pound restructuring programme, but needless to say the ignorati rapidly jumped on the bandwagon, demonstrating a total lack of knowledge of several fairly key areas.. The meeja started it, shouting about excess salaries for temporary staff. A spokesman from Unite – who, let us not forget, are representing workers and so might be expected to have at least a working understanding of the labour market – started banging on about “overpaid contractors” taking work from “permanent staff”. Assorted comments in a range of newspapers picked up the baton. A shadow Treasury Minister came out with the same line. OK, so he’s a politician of course, so we shoudn’t expect too much wisdom perhaps.

The thing is, to a man they were going on about excessive salaries. Nobody can possibly be worth that much (well they can, actually, work out the cost of employment of a permie on an £80k salary plus bonus and package). And what is more, as ony fule kno these aren’t salaries, they’re payments to companies for services rendered. To convert them into salaries, you have to knock off the long list of expenses that contractors have to cover for themselves – employers NICs, holiday pay, sick pay, pensions, expenses, bench time funding, corporation tax and all the rest. And even then you probably haven’t got to a salary since you don’t know how much the contractor is taking back out of his company.

Or perhaps these deluded souls actually think that the fitter from British Gas charging you £80 an hour to fix your boiler is on £166,000 a year salary? I suppose that’s quite likely, given the state of our education system…

The really sad thing is that we have a unique and highly effective contractor workforce in this country. Its end clients – like RBS – recognise its worth and understand the economic realities that make a contractor a very good use of money. One recent client of mine paid £60k for a contractor’s services over several months, but he left them with a £430,000 saving. Which I, and they, think is actually not a bad return.

Good contractors are worth their day rate. Such a shame that people who probably understand that perfectly well prefer to distort reality in the pursuit of cheap, and very hypocritical, political point scoring.

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

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Smallest firms could get more time to prepare for pensions auto-enrolment

Smaller firms may be pleased to learn that the government is considering giving them more time to get ready for automatically enrolling their employees in pension schemes.

The Pensions Regulator last week issued guidance for employers that says smaller firms sharing PAYE schemes with other like businesses will see their staging dates deferred by up to 23 months.

The new alterations are expected to be written into legislation prior to the Pensions Bill becoming law and will cover firms with less than 10 employees who are included in a larger PAYE scheme which has in excess of 239 members.

A business fitting the above description would have until the first of January 2016 to implement auto-enrolment.

The Pensions Regulator has also launched some interactive tools to explain the new regulations. As from October next year, employers and recruitment businesses will be required to auto-enrol workers after they have completed 12 weeks service. Employees then have the option of opting out if they do not want to participate in the scheme their employer has chosen. This new duty is to be phased in over several years, starting with larger organisations.

The interactive tools will help businesses establish their staging date, help them understand which employees need to be enrolled and how to enrol them, and what level of contribution is required for each eligible employee.

The REC still has concerns that auto-enrolment will create challenges for recruiters due to high levels of turnover amongst temps and the expectation that a lot of agency workers will opt-out of the pension scheme they have been enrolled in.

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Income tax and NI merger moves a step closer

The government is proceeding with its plan to merge income tax and national insurance by first inviting businesses to provide evidence of the problems they encounter administering two separate taxes.

Employers and payroll professionals will have until the 19th of September to answer 14 questions primarily focusing on the burden of the PAYE system.

One of the questions on this evidence-seeking consultation asks respondents to rank the amount of time spent carrying out income tax and national insurance processes on a scale of one to five. Others ask about calculation errors, usage of payroll processing software and the introduction of Real Time Information.

David Gauke, the exchequer secretary, said the coalition has committed to making the taxation system in the UK the most competitive in the G20 countries for business, as well as simpler for individual taxpayers to understand.

Integrating income tax and national insurance will be a radical reform, but the government believes it will bring about real improvements, he added.

Anthony Thomas, the president of the CIoT, has welcomed the government’s decision to gather evidence from interested parties. He pointed out that a recent OTS report showed that both employers and HMRC can make significant administrative savings by harmonising the way NI and income tax are run.

The responses to this process will give the government an idea of how it should proceed with the formal consultation which is planned for the autumn.

The Treasury has also made it clear that NICs will not be levied on pensions, people above pension age, dividends or savings.

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More than 40% of annual earnings go to the state in taxes!

Contractor accountants and other UK workers spent an extra 3 days paying their tax bill this year, according to the Adam Smith Institute.

Tax Freedom Day this year was Monday the 27th of May. That means British workers spent the first 149 days of 2011 working for the state. The additional 3 days were mostly caused by the VAT increase at the beginning of the year.

It takes 39 days for the average British worker to earn enough to pay their annual income tax bill, a further 26 days to settle National Insurance liabilities and 29 days to pay VAT. Council tax takes up seven days of income and you need to complete a 5 day working week to pay the duty on alcohol and tobacco.

Sam Bowman, the think tank’s head of research, said it was no wonder that economic growth was so slow when we are slaves to the state for five months of the year.

Meanwhile, freelancers entering higher tax brackets could be tempted to increase the amount they pay into their pension fund.

The number of people paying higher rate 40% tax is expected to increase to 3.7 million this year, whilst 275,000 people will fall into the 50% bracket.

Bill Mackay, the marketing director of AJ Bell, pointed out that making pension contributions was one of the best ways to benefit from tax relief. His company witnessed a 179% year on year increase in the number of single contributions to two of its accounts in April.

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Will accountants for contractors take on the Red Tape Challenge?

Since the coalition launched its Red Tape Challenge website, more than 6,000 responses have been received, according to government data.

Businesses and limited company contractors have been invited to submit their comments on current and forthcoming legislation to give the government an opportunity to adapt the regulations before they are implemented.

A lot of the published statements have called for changes in the retail environment and industry sector champion, Dr Kevin Hawkins, urges consumers, suppliers and trade associations to visit the site and express their concerns and solutions. He described the Red Tape Challenge website as a chance “too good to miss”.

He went on to say that this is the first time the government has given those at the sharp end of complex regulation the chance to be heard. This is a golden opportunity for business owners to tell politicians about the bureaucracy that wastes time and money and suggest ways to improve things for both themselves and their customers.

The business secretary, Vince Cable, says that unless ministers can come up with strong reasons why an item of unpopular regulation should remain, government departments will scrap it.

Amongst other legislation up for debate, the website contains 278 environment regulations, 264 concerning pensions and 151 that cover employment law.

The portal has already received concerns over the Care Quality Commission agency and health and safety guidance.

One man wrote that the CQC does not understand that dentists operate small businesses and do not have the staff to spend hours filling in forms and undertaking compliance audits. He went on to point out that too much reliance is put on box ticking exercises and the government doesn’t seem to appreciate that professional staff are regulated and are committed to providing the highest possible standards.

The owner of a small construction company recommended a rethink over the work time allowable for the use of steps and ladders.

However, not everybody is happy about this new government initiative. One lady asked why the public was being asked to contribute their views when MPs are paid to sort out these problems.

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Britain’s wealthiest to lose 3% of their income

The richest 10% of the UK’s population is set to lose an average 3% of their net income due to the complex tax changes that come into force this April, according to the Institute of Fiscal Studies.

750,000 more people will need to pay tax at the higher 40% rate because the government has reduced the threshold at which this rate takes effect. High earners will also need to pay more national insurance and will face restrictions on the tax free amount they can invest in their pension fund.

Contractor accountants earning over £150,000 now have to pay tax at 50% on all earned income above that amount and those with income above £100,000 have lost their personal tax allowance.

Child tax credit changes will also cause a large increase in marginal tax for the 175,000 adults who earn about £40,000 a year.

It’s not only employees that will be affected by these changes. High earning contractors should make sure they understand how the tax changes will affect them. One of the biggest changes, and one that a lot of people do not seem to be aware of, is the reduction in pension tax relief.

At present an individual can save £255,000 a year in their pension fund and obtain tax relief. As from April, that figure drops down to just £50,000. This new rule could have an adverse affect on people who pile a lot of money into their pension fund as they approach retirement age.

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HMRC caught napping again?

HMRC is in hot water yet again; this time over data showing that over 9 million National Insurance contributions dating back as far as 2004–05 have not been added to employees’ records.

The total monetary value of these unmatched contributions is in excess of £1.2 billion.

Ian Liddell-Grainger, the MP who chairs the All Party Parliamentary Group on Taxation, warned taxpayers that their pensions might be affected if HMRC does not resolve this backlog.

The problem stems from mistakes on the P14 forms that employers submit to HMRC every May. These forms log the NI and PAYE contributions for individual employees. If the Revenue finds an error, it is supposed to contact the employer in order to obtain the correct information. However, it appears that administrative corners were cut and this did not happen.

The MP said that taxpayers with unmatched NICs may need to find their old payslips or ask their employer to verify the contributions paid.

In order to qualify for a full state pension, individuals have to have paid contributions for a minimum of 30 years.

Employers have reacted angrily to suggestions that they are to blame for this situation. Phil McCabe from the FPB pointed out that HMRC has a track record of poor levels of efficiency and administration and the tax system needs simplification.

HMRC has fought back at the media coverage by posting a notice on its website saying that the department has not lost the contributions. Unmatched contributions are placed in a suspense account until they can be correctly allocated.

A spokesman for the Revenue explained that they write to individuals if they see a gap in contributions and respond to the situation immediately if someone reports a gap. It is simply not true that millions of people will lose their correct pension entitlement.

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Don’t rely on your home to fund your retirement

The government wants to see the housing market depressed in order to make it easier for first time buyers to buy a property.

Experts have already predicted that house prices will fall this year by between 6% and 10% and homeowners are being warned that they should not expect to fund their retirement by releasing home equity.

Councils and property developers will be encouraged to construct more homes, which will depress the market and help first-time buyers.

On Monday, Grant Shapps, the housing minister, said that property should be regarded as somewhere to live rather than an investment. He wants to see a rational housing market where property prices rose by less than salaries. If property values were to fall in real terms this would benefit the millions of young people who are currently unable to afford to buy, he added.

Shapps pointed out that it was crazy for housing to be so unaffordable and that past scenarios whereby house prices boomed over a short period of time was unhelpful.

This may seem hypocritical coming from a man who is thought of as an astute property speculator. He profited by £250,000 on one property deal and his current five-bedroomed home would realise over £1 million if sold.

Whilst it might benefit first-time buyers to have a rational housing market, homeowners who were relying on home equity to fund their retirement will not welcome the move. They have already seen their pension funds severely eroded by the economic crisis.

Homeowners now have to remain in their properties for longer than ever, according to new figures from the CML. They now spend nearly double the length of time in their current home before putting it up for sale compared to the beginning of the recession. In 2007, people stayed about 11 years in a property; now it is 21.5 years.

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EU pensions proposals are rejected by the government

The Department of Works and Pensions has rejected EU proposals to set up a defined benefit pensions solvency regime.

The minister for pensions, Steve Webb, said he did not think that one European model would fit all the EU pension systems as there is a rich diversity of pension provision across the member states.

The European Commission launched its pensions consultation in the summer saying that there is now a massive strain on national retirement systems because of the ageing population and the economic crisis has added yet more pressure.

The National Association of Pension Funds believes that EU plans to ensure pension fund solvency would have undermined pension provision. One proposed solution to the pension’s problem was to mirror the system the EU adopted for the insurance industry. NAPF says this was not a workable solution because of the differences in the ways the two industries operate.

NAPF’s chief executive, Joanne Segars, pointed out that the pension system in the UK already has strong protection through the employer covenant, the Pensions Regulator and the Pension Protection Fund. She said that adding additional requirements could have the opposite effect of promoting adequate pension provisions and lead to defined-benefit schemes closing.

On the other hand, the Investment Management Association has claimed that a single European pensions market could bring significant benefits to freelance savers.

The Association made its statement in response to the European Commission green paper calling for the views of stakeholders on the best ways to create sustainable, stable pensions. The IMA did point out that, whilst it backs the single market idea, existing retirement funds should not be damaged if one were to be established.

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There’s widespread confusion over personal taxation

It will probably come as no surprise to contractor accountants to learn that many people in the UK are confused by our taxation system.

According to recent research from HSBC, 53% of adults do not know that their personal tax allowance is £6,475 and 81% do not know at what income level the higher tax rates kick in. Annual earnings between £37,401 and £150,000 are currently taxed at a rate of 40% and any earnings above £150,000 are taxed at 50%. Additionally, 54% have no idea what their income tax code is and more than a third of taxpayers never check their end of tax year P60 form.

Employees are just as confused as to what they actually pay income tax on. Over 50% did not realise that employee benefits are taxable and slightly under a third did not know that income from pensions was classed as taxable income. We fare little better when it comes to understanding income tax on our savings. 20% of adults didn’t know that the majority of savings were taxed and an additional 10% thought that cash ISAs, which are tax-free, did get taxed.

The results of the bank’s research were highlighted in the BBC Panorama programme on Monday, 11th October. Christine Foyster, HSBC’s senior manager of investments and savings told viewers that it was important for the British workforce to realise how much tax they should currently pay and the amount they have paid in previous years.

Taxpayers and limited company contractors in the UK should make sure they understand all aspects of the finances, including their tax allowances, if they want to make the most of their money, she added.

HMRC has admitted that more than a million taxpayers were charged too much tax last year, but if we do not understand the tax system, how many cases could have slipped through the net?

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Pension apathy in the UK

Out of the UK’s 17 million strong workforce, nearly half of them haven’t even reviewed their pension plans, according to new data released recently by asset manager Barings. Contractor accountants might want to consider whether their clients fall into this bracket!

ISM Research conducted the poll on Barings’ behalf and found that 48 per cent of those interviewed had never reviewed their pension plan. 21 per cent of respondents admitted to reviewing their plan sometime in the previous year.

The survey, gathered information from 1,478 workers, weighing the answers by population, found that a full one third of the people who answered that they had indeed reviewed their pension plan couldn’t recall if they had chosen the default contribution option or not contributions.

Nearly 20 per cent of respondents that had no knowledge of where their pension funds were invested were either at the age of 55 or older.

Barings conducted similar research last year, and in a comparison of the findings, more UK workers are making their own investment decisions than in 2009, but there was also a 43 per cent increase in the amount of people neglecting to review their plans as well.

Marino Valensise, chief investment officer for Barings, stated that it was concerning to see so many people, including limited company contractors, have either a reduced interest – or no interest at all – in planning financially for their elder years.

Mr Valensise also commented on the responsibilities of the investment industry, calling for an improvement to the methods in which pension advice is given in order to ensure people have a more through understanding of risk levels and the kind of return they can expect from their investments.

In related news, the Fair Investment Company’s head of investment and pension research, George Ladds, recently recommended younger members of Britain’s workforce should consider retirement planning that includes investing in ISAs by contributing at least £50 on a monthly basis from age 30 and afterwards.

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Coalition should rethink the new compulsory pension scheme

The FSB thinks that micro firms should not need to comply with the government’s new pension scheme that comes into effect in 2012.

Under the new plans, all businesses need to enrol their employees in a pension scheme automatically but this would cause an undue burden on firms with 10 staff members or less, according to the Federation.

The FSB also believes that the government set up pension schemes do not meet the requirements of SMEs and that the time and money spent on their administration would be damaging.

Mike Cherry from the FSB said that whilst they welcomed plans that encourage people to save for the future, the new automatic payroll pension scheme will cause administrative headaches for smaller businesses.

To back up their comments, the FSB conducted research that revealed that 70% of business owners are not confident about selecting a pension plan for their employees due to its complexity. To solve this problem, the FSB suggests that a default scheme is set up and anyone who is currently not in a pension scheme should be enrolled.

The REC, on the other hand, is concerned about the auto-enrolment issues for recruitment agencies using temporary workers. The Confederation would like there to be a six month qualifying period before a worker is enrolled into a pension scheme. They point out that the bureaucracy involved in setting up a new scheme for a worker who is only temping for a few weeks will not be off-set by savings benefits.

The REC intends to work with the coalition to make sure the pension reforms will work for everybody concerned.

In addition to the qualifying period, the REC is calling for an option that allows workers to opt out of the scheme before enrolment and the maintenance of the National Employment Savings Trust which all employers can access.

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